Home / Analysis / Full disclosure: The Hayne fallout continues
25 February 2019
The ramifications of the Hayne royal commission are still becoming clear three weeks after the release of its final report.
Many of the recommendations reflect work already under way in areas such as add-on insurance and extending unfair contract terms provisions to insurance, and came as little surprise.
But Commissioner Kenneth Hayne has opened up other matters for examination – some after problems elsewhere in financial services sparked another look at general insurance.
These include once again examining the duty of disclosure on consumers when buying from insurers.
The final report recommends amending the Insurance Contracts Act to replace the consumer’s duty of disclosure with a “duty to take reasonable care not to make a misrepresentation”.
This places a greater burden on the insurer to elicit information it needs to assess risk and pricing, rather than leaving it to consumers to decide what details might be important.
“Insurers are always better placed than an insured to identify the categories of information they consider to be relevant to their decision of whether to insure a risk,” Commissioner Hayne says.
The Insurance Council of Australia (ICA) is examining the recommendation’s impact on insurers and the benefits it may bring for policyholders.
“Implementation would involve substantial disruption for those companies that have based their processes upon the duty of disclosure in the Insurance Contracts Act, which was only amended in 2013,” ICA spokesman Campbell Fuller told insuranceNEWS.com.au.
Law firm Clyde & Co notes that the Federal Government, which plans to adopt all 76 Hayne recommendations, has committed to the amendment, and industry participants should make sure they are prepared.
“It would be prudent for insurers with retail business in Australia to start considering the impact of this proposed change on their pre-sales scripts and questionnaires, underwriting operations and pricing of insurance policies,” it says.
The law firm also warns the change could open the door to discussion on more wide-ranging disclosure obligation impacts, although no specific comments were made on contracts outside the consumer arena.
“This possibility has been discussed previously and may be raised again during the legislative process to implement this recommendation,” it says.
Finity Principal Geoff Atkins says the disclosure changes and a “no hawking” recommendation are examples of general insurance being swept up in changes aimed at other financial services.
“They are both direct responses to life insurance issues,” he said. “There was no mention of general insurance until the commission said, ‘The products are no different, so why not just apply it to all?’.”
The issue was highlighted in a royal commission case study involving life insurer TAL and the treatment – when denying a claim – of a consumer’s answers on their medical history.
But Commissioner Hayne notes legislation applying to general insurance and disclosure was changed in the UK in 2012 after a review.
Current framing of the disclosure duty has its roots in common law developments during the 18th and 19th centuries that were codified by the UK Parliament in 1906, according to the final report.
“Times, and the parties to insurance contracts, have since changed markedly,” Commissioner Hayne says. “Insurance is no longer the province of a mercantile class. It is a universal product.”
The Financial Rights Legal Centre says it 100% backs the recommendation, which has also gained full support in the Australian Labor Party’s response to the commission.
“It is based upon the UK model and we would want it implemented here,” legal centre Policy and Advocacy Officer Drew MacRae says.
Finity says traditionalist reactions suggest the proposed reform may sweep away “200 years of common law”, but the changes are likely to have only a minor impact on personal lines.
“We expect that denial of claims on the grounds of non-disclosure, apart from those regarded as ‘deliberate or fraudulent’, is relatively uncommon,” Mr Atkins says in a Finity blog post.
Most disclosure disputes would probably end up with the new Australian Financial Complaints Authority (AFCA), where the ramifications of any revised approach would become clear.
“If AFCA decisions are based on the view that the new law is fundamentally different, and that claims that would currently be denied based on non-disclosure would in future be regarded as ‘innocent misrepresentation’, then it might become materially more difficult for an insurer to deny a claim for non-disclosure,” Mr Atkins says.
“This risk is an example of the importance of how the law is applied in practice as distinct from the importance of what the law says.”
The Government is yet to provide more details on how it will implement the recommendation, but insurers want to be involved as details are hammered out.
“ICA looks forward to a thorough consultative process on the implementation of this and all other recommendations that affect the general insurance sector and its customers,” Mr Fuller says.